Month: November 2003

In defense of short sellers

Read James Surowiecki’s insightful New Yorker column on the short selling of securities.

He notes:

Short sellers are investors who sell assets (a company’s shares, say) that they have borrowed, in the hope that the price will fall; if it does, they can buy the shares at a lower price, return them to the trader they borrowed them from, and pocket the difference. In effect, they are betting against a company’s stock price. As a result, they have, historically, been regarded with great suspicion…

But the fears of short sellers are largely unjustified:

Even when short sellers aren’t uncovering malfeasance, their presence in the market is useful. If you think of a stock price as a weighted average of the expectations of investors, restrictions on short selling skew that average by shutting out people with contrary opinions. It’s a bit like setting a point spread for a football game by allowing people to bet only on one side. When a team of Yale management professors did a study of forty-seven stock markets around the world, they found that markets with active short sellers reacted to information more quickly and set prices more accurately.

I’ll second his conclusion that “The case against these bears is a lot of bull.”

African Americans and Government

Tyler may be correct that “the government as employer has done more for black communities than the government as purveyor of affirmative action.” But isn’t there something disturbing about this? Consider the following: Who do you think wrote:

The widely proclaimed growth in the black middle class in the 1960s and early 1970s associated with claims of “dramatic black progress” were in large measure attributable to the expansion of Great Society programs and the professional employment repercussions at levels of government. These programs played less of a role in generating an increase in the black middle class by uplifting the black poor than by providing direct employment to many blacks as social service providers to other impoverished blacks. Thus, one of the main legacies of the Great Society was to cement the symbiosis between the black poor and the black middle class – the former as the clients of the social service system and the latter as the service providers.

No, it wasn’t Charles Murray. It was the radical-leftist economist William Darity Jr., himself an African-American, writing in the May 1990 issue of the AER (JSTOR link). If true, what this suggests is that even middle-class black Americans were, and perhaps are, much less well integrated into the American economy than we might think from income statistics. I find this disturbing from just about any angle.

Get your Flu Shot!

We do not respond to risks rationally. We are scared of Ebola, pesticides, nuclear radiation and terrorists but the flu? Who cares about the flu? You should. In an average year, the flu kills almost as many people as die in auto accidents (36,000 for the flu, 42, 815 for highway accidents in 2002) and this year experts expect some 50-70 thousand flu deaths. True, those over 65 years of age and older are most at risk but thousands of younger people die from the flu every year. A flu shot reduces your chances of death by 50 percent. (Here is more flu info from the CDC.)

Medicare, continued

Debates over the Medicare bill focus on two key aspects. First, it is fiscally irresponsible. Second, will the encouragement of competing private health plans raise or lower costs?

Where is Medicare cost inflation coming from?

The major elements in the Medicare program’s overall rise in costs have been increased enrollment (from 20 million beneficiaries in 1970 to 40 million this year) and the same factors that have led to increases in health care spending in the nation as a whole–most notably, the development and diffusion of new medical technology. Other contributors to cost growth have been program expansions as a result of legislative and administrative changes.

In dollar terms, inpatient hospital care accounts for the largest portion of the Medicare program’s growth. Expenditures for skilled nursing care and home health services, though constituting only 5 percent each of current program spending, have grown particularly rapidly. Real spending for those services increased at an average annual rate of about 12 percent from 1975 to 2001, compared with an average annual rate of about 7 percent for total Medicare spending.

From testimony of Douglas Holtz-Eakin, former head of the Congressional Budget Office, a well-respected economist.

It is not obvious that private insurance companies will lower these costs, at least not under current institutional structures. Here is one balanced analysis:

Whatever its faults as a heavily regulated program, Medicare is efficient at holding down costs because it can set prices, has unmatched purchasing and negotiating power because of its size and virtually no overhead. Its administrative costs are about 2 percent.

Administrative, marketing and overhead costs for private insurers were 16 percent last year, according to the government’s Centers for Medicare and Medicaid Services. They also have to set aside reserves and still make a profit.

Reischauer said private insurers can make up a great deal of those costs through market efficiencies and innovations — such as preventive care and disease management, which could be particularly important with chronically ill Medicare patients. But even then, if costs are not far below traditional Medicare or slightly above, seniors are unlikely to be attracted, he said.

This problem is what led the nonpartisan Congressional Budget Office to project that only 10 percent more seniors would enroll in managed care plans by 2010 — which would constitute an abject failure in moving seniors into a supposedly more efficient managed care plan. That figure is in stark contrast to projections by the administration of 43 percent.

In other words, the bill may not mean the end of Medicare as we know it, as some critics have charged. Here is another estimate that switches to private plans will be modest. In this regard the bill may matter less than many people think. I’ll go out on a limb and predict that we have voted in prescription drug benefits, but without fundamentally changing the system as a whole or doing anything to control costs.

What is the key problem on the cost side? Medicare, however low its overhead, serves political constituencies and cannot be expected to cut people off from emergency measures in their last year or so of life. And given the existence of the Medicare option, private health plans cannot get tough on these costs either and still draw customers. Right now, for better or worse, we have no institutional option to stop people from spending large sums of money on health care in the last year of their lives.

As for prescription drugs, the new bill will displace private alternatives over time, read this analysis:

Of the just over 40 million Medicare beneficiaries, almost half (46 percent) already have fairly comprehensive drug coverage through an employer-sponsored retirement plan. Another 29 percent of Medicare beneficiaries have some drug coverage from another private or public source. It is only the remaining 25 percent of Medicare beneficiaries (about 10 million) who have no drug coverage at all.

I will also predict that employers, seeking to cut health care costs, will withdraw these benefits over time, making the bill an even worse fiscal nightmare than has been expected.

The bottom line: Ugh. But unless we are willing to be mean and nasty to dying old people, in the interests of drastically lowering costs, we have no one to blame but ourselves for the current problems. We can, however, in addition still blame the Bush administration for political pandering and lack of fiscal discipline.

Addendum: Read this article on whether the new bill will stick, thanks to David Levy for the pointer.

The Medicare bill

Daniel Drezner offers an excellent analysis, replete with useful links. His bottom line: it is poorly designed and a fiscal catastrophe. He reproduces a Heritage graph with the rather tragic heading: “A Drug Benefit Will Add $2 Trillion to Medicare’s $5 Trillion Shortfall by 2030,” see the link for the visual. Drezner, who describes himself as a “pragmatic libertarian,” is, like myself, depressed at the current political climate and the willingness of the Republicans to abandon principle and fiscal discipline.

Equality within black communities

The gap between rich and poor blacks is smaller in Maryland than in almost any other state, click here for the full story. Black households in Maryland scored a Gini coefficient of .430, only in Alaska is within-black inequality lower, counting only the states with a black population of three percent or higher. Most of the middle class black communities are concentrated around Washington D.C., much of the black poverty in Maryland comes from Baltimore.

David Dishneau notes the following: “The numbers reflect a relatively large black middle class, supported by good-paying, stable jobs in government, biotechnology and related industries, social scientists say.” In other words, the government as employer has done more for black communities than the government as purveyor of affirmative action. Yes our government has played a heroic role in helping stamp out unjust racial inequalities, but let us assign the credit to the policies that deserve it. When it comes to Alaska, seventeen percent of adults are veterans, the highest percentage of any state. Once again government employment, in this case mostly through the military, may play a significant role in reducing inequality and helping to create a black middle class.

Buy, Eye in the Sky

For those who have nearly everything and can afford more, you can now buy your own space mission (on Ebay naturally). The offer, from SpaceDev, a real firm that sells micro-satellites, does not appear to be a hoax. Although, like space tourism, this is obviously in the early stages and something of publicity stunt it is also another important step towards the private exploration of space. For more on the offer see this item in Wired News.

50 Things You’re Not Supposed to Know

That is the title of this new book, which I picked up while browsing in Harvard Book store in Cambridge. The book is most interesting as someone’s vision of what he thinks might, or ought to, shock other people.

In reality, few of the examples succeed. I suppose not everyone knows that “Black People Served in the Confederate Army” (#20), and surely few people know that “The first CIA agent to die in the Line of Duty was Douglas Mackiernan” (#4). But the author moves pretty quickly to gross exaggerations, such as “The US is Planning to Provoke Terrorist Attacks” (#7), or “World War III Almost Started in 1995” (#10), for a while the Soviets were misreading data and thought we had launched some nukes.

The funniest one, for me, is #27: “Most Scientists Don’t Read All of the Articles They Cite.” Who exactly is supposed to be shocked by this? The authors, however, do offer some data. A particular article was cited 4300 times, 196 times with typographical errors in the citation. Of those 196 errors, 78 times the same mistake appeared, which suggests the author simply copied the reference from another bibliography. In reality, I think this is a gross underestimate of the phenomenon, noting that a common typographical error doesn’t mean the scholar didn’t read the piece, it only means he compiled his bibliography from others.

It was news to me, however, that Pope Pius II, in fifteenth century Europe, had written an erotic book.

The economics of on-line dating

Yesterday’s New York Times Magazine offers a lengthy look at on-line dating. This article is longer than most links I offer, it is not full of economic reasoning though the interesting and salacious content may keep you reading.

The bottom line, however, is simple. On-line dating seems to serve (at least) two major constituencies. First, many people use it to marry or otherwise find a monogamous relationship. claims to have lost 140,000 members, by enabling those people to find partners. Second, many people use internet dating to find casual sex or serial partners. The article quotes a “Greg,” who enjoys a first date with quickie sex at the end, and then offers the following remark: “I liked her, but not enough to merit fireworks. Given the seemingly endless selectoin, I get to be a little less forgiving.”

Since I suspect that on-line dating is more effective than not, people will increasingly choose one category or the other. Those people who are willing and able to marry, will find their partners and marry. After some period of time, the stock of marriageable people will be smaller. (Note: I believe that some decent chunk of the unmarried are simply emotionally incapable of marrying, for whatever reason.) The remaining unmarried will then find relatively higher returns from the serial dating and casual sex routes. So the distribution of the number of sexual partners will become more bimodal over time.

Furthermore, the last two years have been an especially good time to marry through on-line dating. The new technology is being applied to a large stock of unmarried people who could marry and be happy, but who otherwise could not find the right partner. Yes, an ongoing flow will replenish the stock but arguably the stock has been at a peak in recent times, given that on-line dating has just taken off. So if you want to marry, hurry up and get on-line. If you are just looking for casual sex, well, you have a greater luxury of waiting and in fact your options will likely improve with time.

Which party is better for the stock market?

Democrats, it turns out, read Hal Varian on this question. Here is a summary of the data:

Professors Santa-Clara and Valkanov look at the excess market return – the difference between a broad index of stock prices (similar to the Standard & Poor’s 500-stock index) and the three-month Treasury bill rate – between 1927 and 1998. The excess return measures how attractive stock investments are compared with completely safe investments like short-term T-bills.

Using this measure, they find that during those 72 years the stock market returned about 11 percent more a year under Democratic presidents and 2 percent more under Republicans – a striking difference.

This nine-percentage-point excess can be broken down further into an average 5.3 percent higher real return for the stock market and a 3.7 percent lower return for Treasury bills under Democratic administrations.

This regularity is harder to explain than you think, and simply defending Democrats or attacking Republicans will not do the trick. Remember, high stock market returns mean, not that things are good per se, but rather that things are better than people had expected.

I might have thought that people simply overestimate how bad Democratic Presidents will be. But no, the market does not appear to decline as the election of a Democrat approaches. Nor do changes in the risk premium seem to account for the patterns. Take a look at the original research.

Small companies, by the way, do especially well under Democrats:

One interesting finding is that although both large and small companies do better under Democratic administrations, small companies do especially well, while larger ones do only a little better. The return on the smallest 10 percent of traded companies is 21 percent higher during Democratic administrations, while the return on the largest 10 percent is only 7.7 percent greater.

Email if you have any good ideas. Maybe being unduly pessimistic also causes us to vote for Democrats, that is the best I can come up with. It is in fact the case that conservatives are happier, and more likely to believe that they are in control of their lives, than are liberals. Maybe we see similar patterns, not just in the cross-section, but also across time. When people feel bad, and out of control, stock prices fall too low, and those people act more like Democrats in the voting booth.

The new medicare bill

This is one debate I simply have not had time to follow. Brad DeLong, however, offers two posts, the first notes that the prescription drug benefit has no funding source. The second, drawing on Henry Aaron, notes that the insurance component of the bill is far from ideal, here is one excerpt, Brad quoting Henry Aaron:

The design of the bill’s drug insurance makes little sense. Any plan that covers the three-hundredth dollar a person spends on drugs in a year, but provides no coverage for that person’s three thousandth dollar of spending has to be regarded as a bit wacky. Yet that is what this bill would do. It would end federal support for Medicaid drug benefits if patients are also eligible for Medicare, even where the new Medicare coverage would be narrower than existing Medicaid coverage. At the same time, it does nothing to remedy Medicare’s other major failings. It does not cap out-of-pocket costs, even though almost all policies covering the nonelderly provide this essential “stop-loss” protection. It provides no additional help to pay crippling nursing home costs, which are poorly covered under the current program. And it does nothing to help the half of the poor elderly and disabled who now receive no help with premiums and cost sharing they can ill afford.

Even worse, the conference committee bill could single out Medicare for unfair benefit cuts or payroll tax increases in the future. Currently, Medicare hospital benefits (part A) are covered by a dedicated payroll tax. Revenues from this tax now exceed costs and, together with the excess collections from past years (which are deposited in the Hospital Insurance trust fund), are sufficient to cover benefits through 2026. Under current law, three-fourths of the cost of Medicare’s Supplemental Medical Insurance (SMI or part B), which covers doctors bills, durable medical equipment, and certain other expenses, are paid from general revenues and the balance by beneficiary premiums.

I’m still a bit baffled by the whole issue, but it appears we have to write down yet another case (e.g., profligate domestic spending increases, various protectionist measures, the stalled energy bill, etc.) of bad economic policy from the people downtown.

Why are we fascinated by celebrities?

Michael Jackson and Kobe Bryant make the front pages for their possible misdeeds. The tabloids are full of news about Reese Witherspoon’s baby boy. Why do we care? Here is one account:

On the surface, the celebrity rags seem to be about sex. But their real subject is reproduction and the future of the human tribe. On the savannah, we needed to monitor how our clan was faring, and given our small populations we could do the job by ourselves, gossiping about how Gronk had left Zumba and that last night she slipped into Uggah’s cave to make a baby, and what our chance might be to steal one of them as a mate. But in a country of 290 million people, where even our next-door neighbors are strangers, we still need to flex those savannah needs for gossip and information in order to measure our species’ prospect. What better proxy than the young, wealthy, handsome, and visible alpha-male and -female breeding stock that Hollywood employs?

So writes Jack Shafer on, see his full analysis. I agree, though I would be reluctant to write with such a reductionist tone myself. Furthermore I think we use celebrities for more prosaic reasons as well. We are fascinated by what produces relative status, something we all seek. We also use celebrities as a topic of social conversation, a means of showing that we are in touch, a way of signaling our views on various issues, and as a vicarious outlet for our hopes and fears. For more, see my What Price Fame?, also shown on the right bar on this blog.